The GOP's ObamaCare Flippers

How the law's perverse incentives—and the health lobby—captured Arizona's Governor.

Updated Feb. 6, 2013 12:01 a.m. ET

As D-Day looms for ObamaCare, one big question is how many states will sign up for its Medicaid expansion. The recent and spectacular flip-flop of Arizona Governor
Jan Brewer
is a case study in the political pressure and fiscal gimmicks designed to get states to succumb. It's also a study in the arcane and perverse ObamaCare incentives that are intended to gather ever more health-care spending under federal control.

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Arizona's current Medicaid program is well run by the program's standards—a low bar—but it is also too large. The program now finances one of every two in-state births and two of every three days seniors spend in nursing homes. Spending tripled in the last decade to $9 billion a year.

That's despite $1.8 billion in cuts since 2009. The state fisc was such a mess that in 2010 Arizona Medicaid banned paying for several types of organ transplants. In March of that year, Ms. Brewer wrote to
Mr. Obama
calling the Affordable Care Act "a vast new entitlement program that our country does not have the resources to support" and also one that "makes our situation much worse, exacerbating our state's fiscal woes by billions of dollars."

Arizona argued before the Supreme Court that the Medicaid mandate was unconstitutional, anti-federalist commandeering—and seven Justices agreed it was "a gun to the head" and allowed states to opt out without penalty.

But so much for that. In her State of the State address last month, Ms. Brewer pulled a political 180°—or maybe 540°—and said expanding Medicaid would "inject $2 billion into our economy and "save and create thousands of jobs." (Is
Larry Summers
moonlighting as a Brewer speechwriter?)

One secret of her switcheroo is Medicaid's "matching rate" formula, in which the feds pick up 67% of Arizona's existing spending and 100% (and later 90%) of the costs of ObamaCare's newly eligible population. The state supposedly no longer needs to spend "billions" but merely an extra $154 million in 2014—then bank $1.6 billion from Washington, which her budget documents call "a return on investment of more than 10-to-1."

ENLARGE

Arizona Governor Jan Brewer
Associated Press

How can the state conjure such money from nothing? The answer is that Ms. Brewer and Arizona hospitals have cooked up a spending scheme to rip off national taxpayers to avoid even the $154 million the state would at first pay. The hospital lobby first floated this scheme in 2011 "for the specific purpose of generating matching federal Medicaid funds."

Here's how it works: Arizona will tax hospitals and insurers for the $154 million. Then it will return $154 million to the health industry via more Medicaid business that will cover the cost of the tax and then some. The money needs to make a round trip from providers to the state and back to providers to game that 67% federal matching rate.

So Arizona takes (say) $3 from a hospital and then turns around and pays the $3 back, using one of the hospital's own dollars that Arizona converted to "revenue" plus two dollars courtesy of Washington for its 67% federal share of the $3 payment. Arizona can then use the hospital's remaining $2 of the original $3 to pay for another $6 of Medicaid expansion.

Some 49 state now use this trick of so-called provider taxes to goose federal spending, up from 21 in 2003. (Alaska is the exception.) But the practice is so abusive that even Mr. Obama proposed new limits in his last two budgets.

This subsidy honeypot can't last forever, which is why other Governors are more skeptical about this Obama Medicaid windfall. When the money inevitably runs out, states will retain permanently larger obligations and lose budget autonomy for a generation or two as health care crowds out other priorities like education and roads.

Ms. Brewer was nonetheless besieged by health-industry lobbying, especially from hospitals that want more government money and the insurers that administer Medicaid. The campaign is orchestrated by Chuck Coughlin, Ms. Brewer's former political strategist, and
Peter Burns,
a former Brewer budget consultant.

Providers are especially powerful at the state and local level, and the goal now is to rush the Brewer-Obama condominium through the Phoenix legislature with little debate. A particular offender is the Arizona Hospital and Healthcare Association, a trade group whose 2012 agenda includes "Oppose Taxpayer Bill of Rights-style legislative referendums or bills that arbitrarily limit state spending."

Ms. Brewer's other rationale is that everybody else is doing it, and that if Arizona opts out of a larger Medicaid then "Arizona's tax dollars would simply be passed to another state." Well, no, Washington would simply spend less money that it doesn't have. In any event Arizona is already a net tax beneficiary—pulling down $1.19 from the feds for every dollar it sends to D.C., according to the Tax Foundation.

Ten other GOP Governors have rejected Mr. Obama's Medicaid bribe, with another 20, Democrats and Republicans, undecided. Twenty are expanding, including Republicans Brian Sandoval of Nevada,
Susana Martinez
of New Mexico,
Jack Dalrymple
of North Dakota and even, on Monday, Ohio's
John Kasich.
Thus does modern government create the carrots and sticks of ever-larger government.

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